Question

TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)

WACC 10.0%

Pre-tax cash flow reduction for other products (cannibalization) -$5,000

Investment cost (depreciable basis) $80,000

Straight-line depreciation rate 33.333%

Annual sales revenues $67,500

Annual operating costs (excl. depreciation) -$25,000

Tax rate 35.0%

Answer 1

=-80000+((67500-25000-5000-80000*33.33%)*(1-35%)+80000*33.33%)/0.1*(1-1/1.1^3)
=$3,825.31